Overnight: Buyers Retreat

By Greg Peel

M&A distraction

It’s rather pointless to spend too much time on an 8 point gain for the ASX200 yesterday in the context of an -800 point fall in the Dow overnight and SPI futures down over -100 points this morning.

We might have been able to take some comfort in the fact Wall Street has seen a spike in intraday volatility in the past several sessions but only a modest decline on a close to close basis, while the ASX200 has fallen around -2% since Monday and -2.7% since the late September interim high. But with the futures down -1.8% this morning there’s no sign of Wall Street simply playing catch-up, such that we may not suffer as much.

The global sell-off we’ve seen in recent sessions has been driven by two factors – the trade war, as manifested in weakening Chinese fundamentals, and rising US interest rates, which impact on stock valuations. The old adage is that if Wall Street sneezes, we catch a cold. In this case, the US economy is as strong as it has been in decades despite Trump’s tariffs, and the Australian economy is very much at the mercy of China.

If China sneezes, we get pneumonia.

Worth noting from yesterday’s local session, nevertheless, is that M&A has suddenly become popular. On Tuesday it was accounting software firm MYOB ((MYO)), which has struggled to keep pace with emerging cloud-based competitors. It rose 19% on the day.

Yesterday it was education company Navitas ((NVT)), which has struggled ever since losing a major university contract a couple of years ago. It rose 22%. And pet-vet chain Greencross ((GXL)), which has drifted its way right out of the ASX200 over recent years, acknowledged it, too, had received some interest. It rose 18%.

We can note that at 11%, Greencross is one of the most shorted stocks on the market.

We did see some evidence yesterday of investors moving back into previous favourites after two sessions of sharp selling. Aristocrat Leisure ((ALL)) rose 2.6% to help consumer discretionary to a session winning 2.1%. CSL ((CSL)) has been correcting for more than two days, and it rose 1.9% to help healthcare to a 1.5% gain.

The banks, for once didn’t fall.

AGL Energy ((AGL)) did, by -1.5%, taking utilities down a session losing -1.3%. All this talk of climate change and how we might best ignore it.

But that was yesterday, and today looks set to be a different story altogether.

Selling Begets Selling

The theme of the past five trading days on Wall Street has been one of selling in the morning, and buying in the afternoon. The underlying trend had been that of a modest net decline, with the big industrials (Dow) outperforming tech (Nasdaq) and the S&P caught in the middle.

Last night Wall Street again opened lower. This time the buyers could not hold on.

Up until last night the US indices had managed to find support at various technical levels and trend lines, providing the base for afternoon recoveries. Last night such levels were breached and this time the buyers stood aside. This then became a trigger not only for humans to sell on a technical basis, but the computers to go nuts.

The carnage was wrought in the afternoon. There was a brief attempt to recover at least some ground towards the close but that, too, was swamped. By that stage traders did not want to risk holding positions overnight.

The biggest thumping was saved for tech, evidenced by the Nasdaq falling a full -4%. Late in the session the Nasdaq breached its 200-day moving average for the first time in two years. “Growth”, at least for the moment, is dead, and “value” is back in fashion after a decade’s hiatus.

Stocks like Amazon, which trade on spectacular PEs due to the expectation of future earnings, while paying little or no dividends, see those PEs jump even higher when future earnings forecasts are reduced by discounting at a higher interest rate. To compensate for the fall in E (earnings), P (share price), too, has to adjust.

Boring old plodders such as consumer staple names in groceries, beverages, pharma and even fast food, which offer slow growth (much slower compared to FANG) but solid and growing dividends over a long time frame, are not as heavily impacted on a PE basis, and if their biggest customer is the US consumer, they also offer a level of trade war immunity.

Defensive stocks such as staples, utilities and REITs all “outperformed” last night but were still not spared from the selling frenzy. When it gets to that point nervous investors simply sell whatever they can and wait for the dust to settle.

The US ten-year yield rose to 3.24% early in the session, helping to trigger this latest round of stock selling, but later there was some evidence of investors parking their money in bonds, at least overnight, rather than hanging on to stocks.

As far as safe haven plays go, gold was stronger but not to the extent a safe haven suggests. The VIX volatility index leapt 44% to 23 to take it back over the supposed “complacent” line at 20 and into nervousness.

It was the biggest one day fall on Wall Street since January, when a brief inflation scare triggered a full -10% correction into March. The market was then “saved” in April by 20% net earnings growth as revealed in the March quarter earnings season, before tipping over again in June, albeit not quite so dramatically.

The market was again saved by 20% plus earnings growth, revealed in the June quarter season in July, and went on to new highs. Here we are again. Wall Street has tumbled in October and the September earnings season begins (unofficially) on Friday.

Those 20%-plus results of the past two quarters were surprisingly good, but not so surprising in being well above average (tax cuts being a primary driver). For this season, Wall Street is a little worried.

Tariffs, by now, will have impacted. The strong greenback will be a factor, as will the flipside fall in emerging market currencies for those companies so exposed. Input costs are rising across the market – a factor noted in Australia’s recent earnings results. And in terms of forward guidance, rising interest rates will come into play.

Will this earnings season again put the brakes on a Wall Street correction? The first of the big banks report tomorrow night.

Commodities

It is probably not something that would gladden the heart of Floridians, but Hurricane Michael – dubbed the worst hurricane in a century, which was also said of Florence – appears to have bypassed Gulf oil infrastructure and as such not made an impact on production/refining.

Hence the oils are down -2-3%.

With the US dollar index not doing much, metals prices did nothing unusual last night.

After what appeared over the past couple of days to be a short-covering rally for the Aussie, it’s back down -0.5% at US$0.7068.

Today

The SPI Overnight closed down -109 points or -1.8%. That would smash the index back through 6000, if it is to be.

US CPI data are out tonight. I don’t think we want those numbers to be too hot. It is unlikely, but not guaranteed, last night’s fall on Wall Street was not a final capitulation trade.

Harvey Norman ((HVN)) goes ex today, Transurban ((TCL)) reports traffic numbers and Whitehaven Coal ((WHC)) releases a production report.

Rudi will not make his weekly appearance on Your Money today (the old Sky Business News).

The Australian share market over the past thirty days…